CPC

Facebook had a great Q1 2012, with a 41 percent increase in ad rates (the cost-per thousand impressions that advertisers pay), according to TBG Digital, a major seller and manager of Facebook advertising campaigns.

This bodes well for Facebook’s Q1 earnings, which the soon-to-go-public social network has yet to report.

The only bad news: performance softened somewhat in the U.S., where Facebook’s growth overall is slowing.

TBG’s conclusion was based on a sample of 327 billion ad impressions from 235 Facebook advertising clients. What follows are TBG’s estimates of Facebook’s Q1 ad performance, accompanied by commentary from TBG CEO Simon Mansell and his team.

CPM rates are up 41%

“Facebook is earning more from Marketplace ads which could have a positive impact on their imminent IPO. We have seen an increase of 41% in Cost per Thousand impressions (CPM) since Q1 2011, which indicates how much Facebook earns per ad served. Average CPM has increased by 15% from Q4 2011 to Q1 2012 with the US seeing an increase of 11% and the UK seeing an increase of 13% during the same period.”

Cost of advertising up by almost 23%

“Cost per Click (CPC) prices have increased by almost 25% since last quarter with the biggest increase in France (35%) followed by the US (20%). There has been a 34% increase in US CPC costs in the past year. Unbalanced supply and demand could be the reason behind these rises. Growth in new users may be slowing but the social network is becoming more attractive to advertisers.”

Ad engagement decreases in the US

“The US experienced a reduction in average Click Through Rate (CTR) of 8% in this quarter with the top five territories seeing an average decrease of 6%. France saw a drop of 13%. CTR is generally a measure of how engaging users find the ad, affected by the quality of the creative and how appropriate the ad’s targeting. However, this drop comes after Facebook has increased the number of ads on a page, sometimes showing up to seven at a time, which could also be a contributing factor to this change.”

On Google’s earnings call yesterday, some analysts honed in on a particular trend: declining cost-per-click rates, or CPCs.

Google’s ad revenue is determined largely by two factors: the number of clicks on ads (“paid clicks”) and how much advertisers pay for each click (“CPC”). The first number has been rising fast — it was up 39% in Q1 of 2012, compared with the previous year.

But the second number has started to decline, and was down for the second consecutive quarter (as compared with a year ago).

Google said that the factors driving CPC are very complicated, and include foreign exchange rates, rising mobile usage of Google (where advertisers pay lower prices per click), faster growth in developing countries (where prices are lower), and changes in ad quality all have an effect.

Most analysts seem to agree that CPCs, taken in isolation, are not the best measure of Google’s business. But if you’re looking for a reason why the stock went down today, other than the new class of stock the company announced, this might be it.

Updated May 12, 2012. Freddy Nager, Prof of Integrated Marketing at UCLA sent me a screen shot showing 9 display ads per page. The unscupulosity of Facebook is at an all time high – right up to their IPO.

THANKS Freddy Nager @AtomicTango, Prof of Integrated Marketing, UCLA for the screen grab of 9 and 10 ads per page.

Updated February 3, 2012. This is how Facebook is growing ad revenues – SEVEN DISPLAY ADS PER PAGE – EVIL!

But despite this kind of “cheating” their revenues are decelerating. And there is the “danger” of advertisers getting smart and changing from paying on a CPM basis to paying only on a CPC basis — paying only when they get the click. That would mean Facebook’s revenue could drop off a cliff.

Multiple ads on the same page run up the impression numbers, but artificially depress click-throughs because even if they wanted to, users can only click on one ad at a time. Shame on your Facebook for overtly and systematically robbing advertisers who pay on a CPM basis.

But then again shame on you advertisers who still pay CPMs when you can easily click a radio button to select CPC — Facebook even suggests a range for you automatically (see inset below).

What is the advantage of paying by CPC (cost per click) instead of CPM (cost per thousand impressions)? Well, remember the old ad industry joke “I know I am wasting half my ad dollars, I just don’t know which half” — well, now you know. In fact, you now know you are wasting 99% of your ad dollars to wasted impressions that get no action/clicks from users AND you know which 99%. See infographic below. So stop paying CPMs and start paying CPCs TODAY. Your ad budget will thank you!

According to data from comScore, in Q3 2010, Facebook served 297 billion display ad impressions giving it 23% of the U.S. market for display ads. In digital channels, since there is no longer the physical limitation of time (airtime on TV) or space (area to put ads on dead-tree pulp) companies can create “inventory” out of thin air and magically increase revenue on the backs of advertisers still willing to pay for impressions. I guess it really is caveat emptor.

how do we judge the relative merit and effectiveness of different types of advertising? By finding a common parameter that can be used to compare “apples to apples.” We argue that cost of customer acquisition is a great candidate for such a parameter.

For example, if television advertising cost $50 million to produce and air, and 1,000 people came to the acquisition website, and 10 people applied for and received credit cards then the CCA — cost of customer acquisition would be $5 million ($50 million / 10 people who got the credit card). Of course television advertisers would claim that the “impressions” from TV would have “branded” millions more people and they would eventually get a credit card from the company. That’s possible. But for the purposes of this exercise, if there is no absolute end-to-end tracking, we don’t count it. Because, for example, many other possible scenarios can also occur, like the person saw this ad for a credit card but ended up getting a card from a different bank, they saw and remembered the ad but they already had several credit cards from the company, etc.

With “online” we can easily see lift in search activity around the time that brand/awareness advertising is in-flight. This is one of the best indicators of interest — the person saw the TV ad, and was inspired enough to go online to do more research to inform their own purchase decision. Modern consumers will typically search and then click through. In rare instances, they will type the URL, but it is usually the domain name, not the special URL — domain_name.com/special_url — just because of pure laziness or simply because they forgot the /special_url portion.

Now let’s look at a print example: a print ad cost $5 million to produce and traffic in targeted magazines. About 1,000 people came to the website and 10 people ended up purchasing the advertised product. So the CCA is $500,000 per customer acquired. There may be more people who saw the ad and eventually came in to buy a product. But again, there is a problem of attribution.

Now a final example from “online” marketing. Search ads were run using Google Adwords and a $1 CPC (cost per click) was paid. Of those people who clicked through 1 in 20 purchased a product. So it took 20 clicks at $1 each to achieve 1 sale – so the cost of customer acquisition is $20.

OK, so what about prodycts not sold online? We can use a proxy which has a known conversion to sales. For example, once a coupon is printed from the website, from historic data the advertiser knows that 30% end up using the coupon – i.e. redeeming with a purchase. So, again, if we used a $1 CPC and 1 in 20 ended up printing the coupon and 30% of those “converted” to an offline sale, the CCA would be $66.67 ($20/0.30).

Digital Consigliere

Dr. Augustine Fou is Digital Consigliere to marketing executives, advising them on digital strategy and Unified Marketing(tm). Dr Fou has over 17 years of in-the-trenches, hands-on experience, which enables him to provide objective, in-depth assessments of their current marketing programs and recommendations for improving business impact and ROI using digital insights.